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Ascendere Daily Update -- January 27, 2011 -- Companies with Expanding ROIC Tend to Surprise to the Upside

Ascendere Daily Update -- January 27, 2011 -- Companies with Expanding ROIC Tend to Surprise to the Upside

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Published by Stephen Castellano
Model Portfolio Daily Update: January 27, 2011
This daily update is a supplement to a monthly report dated December 31, 2010 that details the model portfolio strategies of Ascendere Associates LLC ("Ascendere"). For more information, please see our list of frequently asked questions, suggested tips on using our newsletter or an interview with us on Covestor Live. See also our long-only model based on actual trade data. Please see our disclosures and disclaimers at the back of this report.
Model Portfolio Daily Update: January 27, 2011
This daily update is a supplement to a monthly report dated December 31, 2010 that details the model portfolio strategies of Ascendere Associates LLC ("Ascendere"). For more information, please see our list of frequently asked questions, suggested tips on using our newsletter or an interview with us on Covestor Live. See also our long-only model based on actual trade data. Please see our disclosures and disclaimers at the back of this report.

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Published by: Stephen Castellano on Jan 28, 2011
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 Ascendere Associates LLC January 27, 2011J. Stephen Castellano Page 1 steve@ascenderellc.comwww.ascenderellc.com 
Ascendere Associates LLC Innovative Long/Short Equity Research
Model Portfolio Daily Update: January 27, 2011
This daily update is a supplement to a monthly report dated December 31, 2010 that details the model portfolio strategies of Ascendere Associates LLC ("Ascendere"). For more information, please see our list of  frequently asked questions
 
,suggested tips on using our newsletter or an interview with us on Covestor Live.See also our long-only model based on actual trade data
.
Please see our disclosures and disclaimers at the back of this report.
New Actions Required:
A short position in
Tidewater Inc. (TDW)
closed above its stop price of $57.58 and will be assumed closed at the end of trading tomorrow. A short position in
ProLogis (PLD)
 closed above its stop price of $15.63 and will be assumed closed at the end of trading tomorrow.As we have noted before, over the last few months it has been a better for hedged strategies to short index futures instead of individual stocks, because many relativelyunattractive stocks (fundamental speaking) are increasingly surprising to the upside as the economic backdrop improves against already depressed valuations and fundamentals.
Of Note:
.
 
The 25 stocks in our long models have in total for the month to date experienced at least 45 major positive upgrades from the sell side upgrades that we are aware of. Today,our models experienced four positive revisions:
TRW Automotive (TRW)
was upgraded to Buy from Neutral by Goldman Sachs, which also raised its price target to $77 from$60, based on valuation, above average growth, and low expectations according to TheFlyOnTheWall.com.
RPC, Inc. (RES)
was upgraded to Buy from Hold by Gabelli.
East WestBancorp (EWBC)
had its price target raised to $26 from $22 by Cantor Fitzgerald.
United Continental Holdings (UAL)
was upgraded to Buy from Hold at Dahlman Rose.By consistently buying and holding stocks that demonstrate historical and likely ongoing improvements in returns on capital that are trading a decent relative value, investorsare maximizing their chances of being "surprised" to the upside and are equipping themselves to better ignore the incessant noise that comprises financial news stories andseemingly random price action. UAL is a recent good example of this, having declined nearly 14% last month and risen by almost as much this month. Nothing significant haschanged with its relative standings in our rankings. Through today at least, it remains a fundamentally solid improving company with relative value.
 
 Ascendere Associates LLC January 27, 2011J. Stephen Castellano Page 2 steve@ascenderellc.comwww.ascenderellc.com 
Avnet Inc. (AVT)
reported solid quarterly results after the close today,beating in all key metrics. Revenue guidance for its next fiscal quarter ended March 2011 is now $5.95- 6.55b versus current consensus of $6.198b and EPS guidance is $0.93-1.01 versus consensus of $0.94. As of today, it seems like AVT will remain a highly ranked stock in theTechnology sector.
Avnet Inc.
500499498497496
AVT
20001999199819971996
Information TechnologyTechnology Distributors
500
12/31/2010# EstimatesForecastActualVarianceLTM MarginRevenue
116,685$
6,767$
83$High6,862$ (95)$Low6,593$ 174$
EBITDA
7274$
275$
1$ 4.1%High288$ (12)$Low262$ 13$
EBIT
9252$
257$
5$ 3.8%High266$ (9)$Low244$ 13$
EPS quarter
131.03$
1.07$
0.04$High1.08$ (0.01)$Low1.00$ 0.07$
Shares Outsanding
152 
152 
- 
 
Avnet Inc.
EstimateEstimateEstimateEstimateEstimateNYSE:AVT4/30/121/31/1210/31/117/31/114/30/111/1/1110/2/107/3/104/3/101/2/10
NOPLAT
917904893882852791699579310168 
Economic Charge474479490494488477403326380365 
Economic Profit443425404388365313295253(71) (197) 
Sequential growth4%5%4%6%16%6%17%-458%-64%-87%NOPLAT917904893882852791699579310168  Operating Capital5,2095,2705,3845,4285,3625,2454,9463,6703,7473,602 
ROIC (NOPLAT / Operating17.2%16.9%16.9%17.9%18.6%18.6%18.0%16.3%8.7%4.7%
Sequential growth2%0%-5%-4%0%3%11%87%86%-116%# EBIT Forecasts
66777
EBIAT Trailing 12 months703693683668646  603 536 457 385 318
Depreciation76757577736966616162  Capital Spending, recurring(132)(131)(137)(134)(126)(113)(89)(67)(64)(85)  Working Capital Investment20931(332)(1,351)(1,262)(1,317)(1,266)(392)(115)403 
Free cash flow to the entity856667289 
(740) 
(669) 
(757) (753) 58 267
697
Source: Capital IQ data and estimates, Ascendere Associates data and estimates.
 
 Ascendere Associates LLC January 27, 2011J. Stephen Castellano Page 3 steve@ascenderellc.comwww.ascenderellc.com 
There are limitations inherent in our backtested theoretical model results, particularlywith the fact that such results do not represent actual trading and they may notreflect the impact material economic and market factors might have had on ourdecision making if we were actually managing client money. Please see additionaldisclaimers and disclosures at the back of this report.

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